How Has Singapore’s Stock Market Done When the Economy Shrinks?

A technical recession is defined as the event in which a country’s economic output – as measured by the gross domestic product (GDP) – contracts for two consecutive quarters on a quarter-on-quarter basis.

There’s a risk that Singapore may enter a technical recession soon after the latest figures showed that the nation’s GDP had shrank by 4% quarter-on-quarter for the second-quarter of 2015.

Given this backdrop, there might be many investors who are worried about the stock market here. I thus thought it’d be interesting to look at how stocks have done when Singapore’s economy has shrank.

From 1993 to 2013, Singapore’s GDP had grown from S$98 billion to S$378 billion, according to the Department of Statistics Singapore – that’s very impressive. But it wasn’t all smooth-sailing; there were two years – 1998 and 2001 – when GDP had shrank. Here’s how the Straits Times Index (SGX: ^STI) had done in the years when the economy had contracted as well as in the next subsequent year:

Year Straits Times Index’s annual return
1998 -9%
1999 78%
2001 -16%
2002 -17%

Source: S&P Capital IQ

As you can tell, stocks in Singapore have had a rough time when GDP fell. But, it’s worth noting that in over 20 years, we’ve only had two such data points – and two points don’t make a trend. Furthermore, a shrinking economy can’t tell us much about how stocks will do over the next 12 months. To that point, 1999 was a great year for stocks while 2002 was a painful one.

For me, this is a prime instance of how investors shouldn’t give too much weight to economic data when making investing decisions. Investing legend Peter Lynch once said that “if you spend 13 minutes a year on economics, you’ve wasted 10 minutes.” Focus on valuations and the performance of the businesses that you’re interested in – they are what ultimately matters.

It’s worth noting too that trying to jump in-and-out of stocks is one of the greatest mistakes investors can make. Those who are attempting to time their entries into and exits from the stock market based on the latest economic data may want to think twice.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn't own shares in any company mentioned.